The RBI forecasted that urban demand is “poised for a recovery,” as inflation declines and disposable incomes rise, driven by the “sizeable” income tax relief announced in the Union Budget 2025-26. This fiscal measure is expected to fuel urban consumption and stimulate economic activity in cities.
“Strong rural demand is expected to receive a further fillip from the robust performance of the agriculture sector,” the central bank noted, highlighting how rural areas are set to contribute significantly to the overall economic expansion.
However, the RBI also noted that India’s GDP growth is expected to slow to the weakest pace in four years in 2024-25. After a drop in growth from 6.7% in the April-June quarter to 5.4% in the July-September quarter, the central bank’s internal models predict a recovery, with growth projected at 6.6% for the January-March 2025 quarter.
The central bank further stated that domestic demand would benefit from the recent repo rate cut by the Monetary Policy Committee, offering a stimulus to the economy.
Looking ahead, the RBI forecasts a growth rate of 6.7% for 2025-26, falling within the government’s broader growth range of 6.3-6.8%.As for inflation, the central bank expects it to ease to 4.2% in the upcoming financial year. However, it also flagged ongoing risks to the inflation outlook. “While core inflation remains muted, uncertainty in global financial markets, volatility in energy prices, and adverse weather events present upside risks to the inflation trajectory,” the report said.Addressing external risks, the RBI warned that a strong dollar and shifts in global trade policies could intensify vulnerabilities in emerging markets, including India. These shifts could lead to higher capital outflows, push up risk premiums, and further strain external economic stability.